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Sysco will release its quarterly report on Monday, and after strong performance during the first half of the year, the stock has fallen substantially in recent months. As controversy has swirled around the food distribution giant, longer-term concerns have arisen about whether Sysco can keep up with United Natural Foods in the increasingly important organic and natural food distribution segment, as well as with Chefs' Warehouse and its specialty-food service for independent restaurants. Those factors could put a lid on Sysco's future earnings growth.

Sysco is an immense company with huge economies of scale from its nationwide operations. Its distribution network gives Sysco a nearly insurmountable competitive advantage in the broader food-services industry. But United Natural Foods has successfully carved out a niche in natural and organic food distribution that could eventually challenge Sysco if the trend toward healthier foods continues. Similarly, Chefs' Warehouse is looking to offer premium products to customers that might otherwise choose Sysco. Let's take an early look at what's been happening with Sysco over the past quarter and what we're likely to see in its report.

Stats on Sysco

Analyst EPS Estimate

$0.48

Change From Year-Ago EPS

(2%)

Revenue Estimate

$11.62 billion

Change From Year-Ago Revenue

4.8%

Earnings Beats in Past 4 Quarters

0

Source: Yahoo! Finance.

Can Sysco earnings start growing again?Analysts have kept reducing their guesses about Sysco earnings in recent months, cutting their September-quarter estimates by $0.04 per share and their full-year fiscal 2014 and 2015 projections by about 7%. The stock has given up ground as well, falling 5% since late July.

Sysco didn't give investors what they wanted to see in its June quarter, with the company's stock falling 6% on the day it announced earnings. Net income dropped 9% due to a mix of onetime charges related to corporate restructuring as well as a more than 5% rise in operating expenses. With restaurants reporting relatively weak demand, Sysco suffered from the pass-through effect of restaurants needing fewer products and supplies from the food-services company.

Sysco has a big size advantage over its rivals, but with its size comes certain challenges for Sysco. Unlike Chefs' Warehouse, Sysco can't serve the specific needs of individual local restaurant customers as well because it has to make products that work not only for restaurants but also institutional food clients like hospitals, schools, and hotels. Similarly, Sysco can't offer the breadth of organic and natural food products that United Natural Foods and Hain Celestial do because Sysco has to carry a wide assortment of conventional food as well. That gives Chefs' Warehouse and United Natural the ability to charge higher prices while still retaining loyal customers.

During the quarter, Sysco faced a huge controversy involving how it stored its food supplies. In September, Sysco confirmed that it put meat, dairy products, and fresh fruit and vegetables in ordinary outdoor storage lockers. The incident was embarrassing for the company, which initially downplayed the practice but eventually had to admit that it was widespread and officially reversed its policy on the sites. Fines could be large, but the reputational damage to Sysco could be even more problematic in the long run.

In the Sysco earnings report, watch to see if the company manages to reverse the troubling trend of missed expectations for its net income. If Sysco can't use its size to keep United Natural, Chefs' Warehouse, and Hain Celestial under control, then it could easily lose its competitive advantage in the long run.

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